Is the Trade Deficit to Blame for America’s Economic Problems? A word from Ronald Reagan.

A new report from the United States trade representative links America’s trade deficit with other countries to trade deals entered into going back to the Reagan administration.

Those deal include the North American Free Trade Agreement, the Uruguay Round Agreements that created the World Trade Organization, China’s 2001 Protocol ofAccessiontotheWorld Trade Organization, and a series of others.

The report notes that in 2000, the U.S. trade deficit in manufactured goods was $317 billion, but by 2016 this had grown to $648 billion. It says that “[o]ur trade deficit in goods and services with China soared from $81.9 billion in 2000 [the last full year before China joined the World Trade Organization] to almost $334 billion in 2015.”

The report further states that “the largest trade deal implemented during the Obama administration—our free trade agreement with South Korea—has coincided with a dramatic increase in our trade deficit with that country.”

The report then implies that the trade deficit caused the typical American household’s economic situation to get worse since 2000, and that in reducing the trade deficit we would be improving the plight of the typical American household.

The problem with this analysis is that the trade deficit did not make things worse for the typical American household.

A trade deficit should not be used as a reason to legislatively prohibit everyone in the U.S. from buying low-priced goods. In fact, Americans are better off when we have the freedom to pay lower prices at Wal-Mart, or when buying a new automobile containing parts from around the world, for instance.

It is true that some workers are displaced by low-priced imports. While this is sad, other workers—like those employed in the retail sector or in industries using imported intermediate goods to make their products—actually need those low-priced imports to stay employed.

In reality, many of the problems listed in the report were caused by decades of high and complicated taxes, ever-increasing regulations on businesses, and growing uncertainty by business owners about how the rule of law will apply to their businesses.

Before blaming the trade deficit as the scapegoat, it would be wise to review the words of President Ronald Reagan in discussing trade deficits toward the end of his successful presidency:

We hear talk about the trade deficit, but we must beware of single-entry bookkeeping. The other side of the ledger shows that the growing, dynamic United States economy has attracted $159 billion in foreign capital into the United States. Trade deficits and inflows of foreign capital are not necessarily a sign of an economy’s weakness. During the first 100 years of our nation’s history, while we were developing from an agricultural colony to the industrial leader of the world, the United States ran a trade deficit. And now, as we’re leading a global movement from the industrial age to the information age, we continue to attract investment from around the world.

Now, some people call this debt. By that way of thinking, every time a company sold stock it would be a sign of weakness, and it would be much better to be a company nobody wanted to invest in rather than one everybody wanted to invest in. Take the case of high-tech, high-growth California. Milton Friedman argues that California’s external debt—to other states and other countries—almost certainly dwarfs the external debt of the United States. Does this augur bad days ahead for California? On the contrary, one might argue it’s a sign of strength.

Historically, fast-growing economies often run deficits in the trade of goods and services, experiencing net capital investment from abroad. This predictable and, up to a point, desirable process has been accentuated by slow growth in parts of Europe and the need for debt-ridden third world nations to generate trade surpluses to service their debt. Germany, which has actually lost half-a-million jobs in the last 10 years, has a trade surplus in goods. Mexico has a trade surplus in goods. The United States, which has been the engine keeping the world economy moving forward, has a trade deficit because our growing economy enables us to buy their goods.

Over time, however, these imbalances should be reduced, and there are two ways to do it: We can become more like them, or they can become more like us. We can raise taxes, reregulate our economy, and adopt protectionist legislation of the kind now being considered in Congress. That will effectively slow growth in this nation and stifle international trade. We won’t be able to buy their goods and, certainly, no one will want to invest in the United States. The world can all shrink together, and we can all look forward to hearing the experts once again pontificating about convergence and the limits to growth.

The other solution is for them to become more like us: to adopt low-tax, pro-growth policies; to encourage trade, not discourage it—to make it freer and fairer and more plentiful; to join with the other nations in a cooperative, upward cycle of growth in which all participate; to embrace the possibilities of the new world economy. In fact, we’re beginning to see this happen. Several major industrialized countries have followed the U.S. lead in cutting high marginal tax rates to spur growth. These changes and other market forces are already causing the volume of U.S. exports to boom, with continued growth expected.

-President Ronald Reagan
Partial remarks at the City Club of Cleveland, Ohio — Jan. 11, 1988

The post Don’t Blame the Trade Deficit for America’s Economic Problems appeared first on The Daily Signal.

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